A Sure-Fire Revenue Raiser (Tax Increase) That Everyone Will Love

In this day and age where Democrats and Republicans both do their best to distort any real facts in the tax and deficit debate, I think that I’ve come up with a way to increase revenues (yes, increase taxes) that everyone should love.

Kill IRS Section 409(A) and allow companies to issue stock to employees at any price that they wish until such company is public.  If you need a refresher on what 409(A) is, check out this post which will get you there.

When 409(A) forces companies to raise their option strike price, who wins?  Certainly not the employees who have higher strike prices.  Certainly not the company who will have  trouble incentivizing employees as the option price increases and not even the IRS! Because of the heightened price, there is less gain at a liquidity event.  So even the IRS loses money every time the price is raised.

Let’s be controversial for a moment and suggest that if all strike prices were set to 1 penny, then the employees make a lot more money, the IRS receives more tax revenue on a bigger gain and the company doesn’t have to worry about 409(A) valuations and timing of material events and fundraising affecting their option grants.

I realize that this will not work in the public company setting given the market’s need to see option expensing in the financials, but for private companies, who really cares?  It’s just a made up number at the end of the day, anyways.

I probably need to think a little more deeply on what happens if a public company acquires a private company, but I’ll get there.  The main point is that doing away with 409(A) leads to both more money being put in consumers’ hand and more money in the IRS coffers and it’s essentially “free.”

  • Yes please. I have a half-dozen clients at any given moment who struggle mightily with this issue.  I’m tired of telling them they can’t issue an option to 1 person without spending $15k.

  • But what about the 409(A) Evaluation Consultants and their lobby? They will no longer get our $15,000 checks to do nothing other than rubber stamp stuff.

  • Bravo, Jason!  The noxious alphabet soup of 409A, 123R, and 83b are a deadweight tax on startups and entrepreneurial innovation.  Their impact on private companies and associated jobs creation needs to be euthanized. 

  • you are right